Dan’s Discount Corporation uses target costing to aid in the final decision to release new products to production. A new product is being evaluated. Market research has surveyed the potential market for this product and believes that its unique features will generate a total demand over the product’s life of 65,000 units at an average price of $380. The target costing team has members from market research, design, accounting, and production engineering departments. The team has worked closely with key customers and suppliers. A value analysis of the product has determined that the total cost for the various value-chain functions using the existing process technology are as follows:

Value-Chain Function ………….. Total Cost over Product Life

Research and development ………………….. $ 2,100,000

Design …………………………………………… 250,000

Manufacturing (40% outsourced to suppliers) … 5,000,000

Marketing ……………………………………… 1,400,000

Distribution ……………………………………. 1,500,000

Customer service ……………………………… 3,070,000

Total cost over product life …………………. $13,320,000

Management has a target contribution to profit percentage of 50% of sales. This contribution provides sufficient funds to cover corporate support costs, taxes, and a reasonable profit.

1. Should the new product be released to production? Explain.

2. Approximately 40% of manufacturing costs for this product consists of materials and parts that are purchased from suppliers. Key suppliers on the target-costing team have suggested process improvements that will reduce supplier cost by 15%. Should the new product be released to production? Explain.

3. New process technology can be purchased at a cost of $220,000 that will reduce non-outsourced manufacturing costs by 30%. Assuming the supplier’s process improvements and new process technology are implemented, should the new product be released to production? Explain.